RealNetworks Reports Record Quarterly Revenue

RealNetworks Reports Record Quarterly Revenue

SEATTLE, July 27 /PRNewswire-FirstCall/ -- RealNetworks(R), Inc. (NASDAQ:RNWK), the leading creator of digital media services and software, today announced results for the second quarter ended June 30, 2006.

"We are pleased to report another quarter of continued growth and record revenue," said Rob Glaser, Chairman and CEO of RealNetworks. "Our casual games business continues to be our fastest growth business, posting a 55 percent increase in revenue over the second quarter of last year."

Quarterly Highlights

* Record revenue of $89.4 million

* Net income of $38.9 million

* Earnings per diluted share of $0.22 and adjusted earnings per diluted
share of $0.03

For the second quarter of 2006, revenue grew 8% to $89.4 million compared to $82.7 million reported in the second quarter of 2005. For the second quarter of 2006, revenue in the Consumer Products and Services segment was as follows: Games revenue was $21.2 million, a 55% increase over the second quarter of 2005; Music revenue was $30.1 million, a 21% increase over the second quarter of 2005; and Media Software and Services revenue was $26.1 million, a decrease of 18% from the second quarter of 2005. In the Technology Products and Solutions segment, revenue was $12.0 million in the second quarter, a decrease of 1% from the second quarter of 2005. Foreign currency exchange rate fluctuations negatively impacted 2006 second quarter revenue by approximately $0.5 million compared to the second quarter of 2005.

Net income for the second quarter of 2006 was $38.9 million, or $0.22 per diluted share, compared to $4.7 million, or $0.03 per diluted share, in the second quarter of 2005. Adjusted net income, which excludes the impact of our agreements with Microsoft, equity investment gains, stock-based compensation expenses and estimated income tax related to these items, was $4.8 million, or $0.03 per diluted share, in the second quarter of 2006, compared to $1.8 million, or $0.01 per diluted share, during the same quarter of 2005. A reconciliation of GAAP net income to adjusted net income is provided in the financial tables that accompany this release.

Gross margin was 70% in the second quarter of both 2006 and 2005. Operating expenses for the second quarter of 2006 were $13.1 million compared to $62.9 million in the prior year's quarter. Second quarter 2006 operating expenses include a benefit related to Microsoft's payment under the settlement and commercial agreements signed in the fourth quarter of 2005. Operating expenses also include non-cash, stock-based compensation expense related to Real's adoption of SFAS 123R in 2006. Excluding the impact from the Microsoft agreements and stock-based compensation expense, adjusted operating expenses were $64.7 million compared to $58.2 million in the second quarter of 2005. A reconciliation of GAAP operating expenses to adjusted operating expenses is provided in the financial tables that accompany this release. For the second quarter of 2006, Real's effective tax rate was approximately 37%.

As of June 30, 2006, Real had approximately $769 million in unrestricted cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. Further, the Company expects to receive up to approximately $185 million in additional payments related to the Microsoft agreements over the next three quarters. Microsoft can earn credits against its future payments as a result of delivering music users to Real through its promotional efforts.

In April 2006, Real announced that its Board of Directors approved a $100 million stock repurchase program. Real entered into a 10(b)5-1 plan to facilitate the repurchase. During the second quarter of 2006, Real spent $20.0 million for the repurchase of 2.1 million shares. Since the beginning of 2005, Real has repurchased 20.3 million shares, or approximately 11% of outstanding shares. Total shares outstanding at June 30, 2006 were 160.1 million.

Business Outlook

The following forward-looking statements reflect RealNetworks' expectations as of July 27, 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement.

For the third quarter of 2006, Real expects revenue in the range of $91 million to $94 million, GAAP net income per diluted share of $0.20 to $0.22 and adjusted net income per diluted share of $0.01 to $0.03. This guidance assumes an effective tax rate of approximately 37%.

For the full year of 2006, Real expects revenue in the range of $365 million to $375 million and earnings of $0.75 to $0.80 per diluted share. Additionally, Real expects adjusted net income per diluted share of $0.08 to $0.12 for the full year. This guidance assumes a tax rate of approximately 37%. However, actual federal income taxes paid are expected to be less than 10% due to the utilization of deferred tax assets.

About Non-GAAP Financial Measures

To supplement the Company's consolidated financial results presented in accordance with GAAP, RealNetworks uses non-GAAP measures for certain components of financial performance. These non-GAAP measures include adjusted net income, adjusted net income per basic and diluted share and adjusted operating expenses. Adjusted net income excludes the impact related to non-cash, stock-based compensation expense, income and expenses, including charitable contributions, related to the Microsoft Agreements, equity investment gains and losses and an estimate of the income taxes from the aforementioned items. The presentation of these non-GAAP financial measures is not intended to be considered as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These non-GAAP measures are provided to enhance investors' overall understanding of the Company's current and expected future financial performance. The Company believes these non-GAAP measures provide useful information to management and investors by excluding certain income, expenses and gains and losses that may not be indicative of its core operating and financial results. Management uses these measures on an ongoing basis to track and assess the Company's financial performance. The accompanying financial tables provide reconciliations to the nearest GAAP measure of all non-GAAP measures provided in this press release.

The Company will host a webcast and conference call today at 5:00 pm (Eastern)/ 2:00 pm (Pacific). The live webcast, featuring slides and audio, will be available at http://investor.realnetworks.com/ . Listeners will require RealPlayer(R) to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is "Second Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), August 3rd, and may be accessed by dialing 888-562-4358 (402-530-7649 for international callers).

RNWK-F

ABOUT REALNETWORKS

RealNetworks, Inc. is a leading creator of digital media services and software including Rhapsody(R), RealPlayer(R) 10 and casual PC and mobile games. Broadcasters, network operators, media companies and enterprises use RealNetworks' products and services to create and deliver digital media to PCs, mobile phones and consumer electronic devices. Consumers can access and experience audio/video programming and download RealNetworks' consumer software at http://www.real.com/ . RealNetworks' systems and corporate information are located at http://www.realnetworks.com/ .

Forward Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to: (a) Real's future revenue, expenses, margins, profitability, net income, taxes, earnings per share, adjusted net income, adjusted net income per diluted share, adjusted operating expenses and other measures of results of operations; (b) Real's repurchase of up to $100 million of outstanding shares of common stock; (c) Real's ability to capitalize on industry trends; (d) Real's expected payments under its agreements with Microsoft over the next three quarters; and (e) Real's effective tax rate and federal income taxes to be paid. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: development and consumer acceptance of legal online music distribution services generally and RealNetworks' content services in particular; the potential that we will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings; the risk that the collaborative agreements we have with Microsoft will be less successful than we anticipate; the emergence of new entrants and competition in the market for digital media subscription offerings and online music sales; the impact on our gross margins from content costs and from the mix of subscribers to subscription offerings with higher content costs than others; competitive risks, including competing technologies, products and services, and the competitive activities of our larger competitors, some of which have strong ties to streaming media users through other products; risks associated with the introduction of new products and services; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts; risks relating to the ability of Real's strategic partners' to generate subscribers for Real's digital content services; and risks related to the Company's ability to fully utilize its deferred tax assets. More information about potential risk factors that could affect RealNetworks' business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, 2005 and its quarterly reports on Form 10-Q and from time to time in other reports filed by RealNetworks with the Securities and Exchange Commission. The preparation of our financial statements and forward-looking financial guidance requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results may differ materially from these estimates under different assumptions or conditions. The Company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

NOTE: RealNetworks, Rhapsody and RealPlayer are trademarks or registered trademarks of RealNetworks, Inc. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

Quarters Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
(in thousands, except per share data)

Net revenue $89,409 $82,686 $176,011 $159,258

Cost of revenue 26,646 24,841 53,399 49,578

Gross profit 62,763 57,845 122,612 109,680

Operating expenses:
Research and development 18,684 15,321 36,783 29,027
Sales and marketing 37,961 35,044 74,044 63,064
General and administrative 14,317 7,917 27,543 14,083
Loss on excess office
facilities (A) -- -- 738 --
Subtotal operating expenses 70,962 58,282 139,108 106,174

Antitrust litigation expenses
(benefit) (B) (57,858) 4,650 (97,693) 8,394
Total operating expenses,
net 13,104 62,932 41,415 114,568

Operating income (loss) 49,659 (5,087) 81,197 (4,888)

Other income (expense), net:
Interest income, net 9,381 2,579 17,360 4,595
Equity in net loss of MusicNet -- (2) -- (1,068)
Gain on sales of equity
investments 2,286 7,590 2,286 7,590
Other, net 73 (209) 190 (400)
Other income, net 11,740 9,958 19,836 10,717

Income before income taxes 61,399 4,871 101,033 5,829
Income tax provision (22,521) (162) (37,272) (306)

Net income $38,878 $4,709 $63,761 $5,523

Basic net income per share $0.24 $0.03 $0.40 $0.03
Diluted net income per share $0.22 $0.03 $0.36 $0.03

Shares used to compute basic net
income per share 159,938 171,393 160,410 171,171
Shares used to compute diluted net
income per share 177,337 184,816 177,127 184,752

(A) The loss on unoccupied excess office facilities represents an
increase in the estimate of the loss from building operating costs
not expected to be recovered.

(B) Consists of amounts received under the Settlement and Commercial
agreements with Microsoft, net of certain legal fees, personnel
costs, public relations and other professional service fees incurred
related to antitrust complaints against Microsoft, including
proceedings in the European Union.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

June 30, December 31,
2006 2005
(in thousands)
ASSETS

Current assets:
Cash and cash equivalents $623,180 $651,971
Short-term investments 145,613 129,356
Trade accounts receivable, net
of allowances for doubtful
accounts and sales returns 19,875 16,721
Deferred tax assets, net,
current portion 16,146 54,204
Prepaid expenses and other
current assets 14,734 11,933
Total current assets 819,548 864,185

Equipment, software and leasehold
improvements, at cost:
Equipment and software 62,395 56,402
Leasehold improvements 28,729 27,964
Total equipment, software and
leasehold improvements 91,124 84,366
Less accumulated depreciation
and amortization 57,076 51,228
Net equipment, software and
leasehold improvements 34,048 33,138

Restricted cash equivalents 17,300 17,300
Equity investments 26,542 46,163
Other assets 2,351 2,397
Deferred tax assets, net, non-current
portion 28,145 19,147
Goodwill 132,512 123,330
Other intangible assets, net 8,223 7,337

Total assets $1,068,669 $1,112,997

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $13,453 $11,397
Accrued and other liabilities 69,447 112,340
Deferred revenue, current portion 24,567 25,021
Accrued loss on excess office
facilities, current portion 4,138 4,623
Total current liabilities 111,605 153,381

Deferred revenue, non-current portion 427 276
Accrued loss on excess office
facilities, non-current portion 12,136 13,393
Deferred rent 4,238 4,018
Convertible debt 100,000 100,000
Other long-term liabilities 1,552 196

Total liabilities 229,958 271,264

Total shareholders' equity 838,711 841,733

Total liabilities and
shareholders' equity $1,068,669 $1,112,997

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Six Months Ended June 30,
2006 2005
(in thousands)
Cash flows from operating activities:
Net income $63,761 $5,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,219 7,674
Stock-based compensation 7,311 84
Equity in net losses of MusicNet -- 1,068
Changes in accrued loss on excess office
facilities and content agreement (1,742) (3,899)
Loss on disposal of equipment 76 139
Gain on sales of equity investments (2,286) (7,590)
Deferred income taxes 35,246 --
Other 48 33
Net change in certain operating
assets and liabilities, net of
balances from businesses
acquired during the year (50,651) 7,718
Net cash provided by operating
activities 59,982 10,750

Cash flows from investing activities:
Purchases of equipment, software and
leasehold improvements (5,381) (5,965)
Purchases of intangible assets -- (1,000)
Purchases of short-term investments (102,853) (67,451)
Proceeds from sales and maturities of
short-term investments 86,422 91,743
Decrease in restricted cash equivalents -- 1,338
Proceeds from sales of equity investments 2,286 7,207
Purchases of cost based investments (450) (647)
Payment of acquisition costs, net of
cash acquired (7,086) (14,615)
Net cash provided by (used in)
investing activities (27,062) 10,610

Cash flows from financing activities:
Net proceeds from sale of common
stock under employee purchase plan
and exercise of stock options 34,522 3,370
Repayment of long-term note payable -- (648)
Repurchase of common stock (96,972) --
Net cash provided by (used in)
financing activities (62,450) 2,722

Effect of exchange rate changes on
cash and cash equivalents 739 (281)
Net increase (decrease) in cash and
cash equivalents (28,791) 23,801
Cash and cash equivalents at
beginning of period 651,971 219,426
Cash and cash equivalents at end of
period $623,180 $243,227

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

2006 2005
Q2 Q1 Q4 Q3 Q2 Q1
(in thousands)
Net Revenue by Line
of Business: *
Consumer
products and
services (A) $77,442 $74,811 $73,415 $71,750 $70,593 $64,206
Technology
products and
solutions (B) 11,967 11,791 10,153 10,483 12,093 12,366
Total net
revenue $89,409 $86,602 $83,568 $82,233 $82,686 $76,572

Consumer Products
and Services: *
Subscriptions
(C) $47,452 $47,832 $47,508 $47,347 $47,821 $44,400
Media properties
(D) 11,546 9,484 10,224 9,606 8,986 6,033
E-commerce and
other (E) 18,444 17,495 15,683 14,797 13,786 13,773
Total
consumer
products
and
services
revenue $77,442 $74,811 $73,415 $71,750 $70,593 $64,206

Consumer Products
and Services: *
Music (F) $30,118 $28,918 $27,760 $26,193 $24,933 $22,883
Media software
and services (G) 26,127 27,277 29,914 30,858 32,012 29,134
Games (H) 21,197 18,616 15,741 14,699 13,648 12,189
Total
consumer
products
and
services
revenue $77,442 $74,811 $73,415 $71,750 $70,593 $64,206

Net Revenue by
Geography:
United States $66,542 $65,700 $65,177 $63,478 $63,443 $57,757
Rest of world 22,867 20,902 18,391 18,755 19,243 18,815
Total net
revenue $89,409 $86,602 $83,568 $82,233 $82,686 $76,572

Gross Margin by Line
of Business:
Consumer
products and
services 68% 67% 70% 68% 68% 65%
Technology
products and
solutions 81% 83% 81% 82% 83% 82%
Total gross
margin 70% 69% 71% 70% 70% 68%

Subscribers
(presented as
greater than) **
Total 2,400 2,400 2,250 2,200 2,000 1,850
Music 1,625 1,575 1,425 1,300 1,150 975

* Reclassifications were made to the presentation of 2005 data to conform
to the presentation for 2006
** Beginning the quarter ended March 31, 2005, total and music subscribers
reflect the inclusion of subscribers that registered for the Comcast
Rhapsody Radio Plus service

(A) Revenue is derived from consumer digital media subscription services,
RealPlayer Plus and related products, sales and distribution of third
party software products, content such as games and music, and
advertising

(B) Revenue is derived from media delivery system software, support and
maintenance services, broadcast hosting services and consulting
services

(C) Revenue is derived from consumer digital media subscription services
including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone
subscriptions

(D) Revenue is derived from all advertising and through the distribution
of third party products

(E) Revenue is derived from RealPlayer Plus and related products, sales
of third party software products, and content such as games and music

(F) Revenue is derived from Rhapsody and RadioPass subscription services
and sales of music content, advertising generated from our music and
music related websites and the distribution of third party products

(G) Revenue is derived from SuperPass subscriptions, RealPlayer Plus and
related products, stand-alone subscription services, sales and
distribution of third party software products and advertising related
to our non-game and non-music related web properties

(H) Revenue is derived from the GamePass subscription service, sales of
games, advertising generated from our games and game-related websites
and the distribution of third party products

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

A reconciliation of net income in accordance with GAAP to total adjusted
net income (loss) is as follows:

Quarters Ended
June 30, March 31, December 31,
2006 2006 2005
(in thousands, except per share data)

Net income in accordance with GAAP $38,878 $24,883 $295,640
Stock based compensation 3,673 3,638 19
Loss (Gain) on equity investments (2,286) -- 266
Expenses (benefit) related to
antitrust litigation:
Income (58,000) (40,000) (478,571)
Expenses 997 971 50,850
Charitable contributions 1,805 1,225 14,786
Tax impact of proforma items 19,732 12,717 113,325
Total adjusted net income
(loss) $4,799 $3,434 $(3,685)

GAAP basic net income per share $0.24 $0.15 $1.76
GAAP diluted net income per share $0.22 $0.14 $1.61

Adjusted basic net income (loss) per
share $0.03 $0.02 $(0.02)
Adjusted diluted net income per share $0.03 $0.02 n/a

Shares used to compute basic net
income (loss) per share 159,938 160,887 167,573
Shares used to compute diluted net
income per share 177,337 176,923 183,728

Quarters Ended
September 30, June 30, March 31,
2005 2005 2005

Net income in accordance with GAAP $11,182 $4,709 $814
Stock based compensation 25 48 36
Loss (Gain) on equity investments (11,740) (7,590) --
Expenses (benefit) related to
antitrust litigation:
Income -- -- --
Expenses 3,531 4,650 3,744
Charitable contributions -- -- --
Tax impact of proforma items 3,324 -- --
Total adjusted net income
(loss) $6,322 $1,817 $4,594

GAAP basic net income per share $0.07 $0.03 $0.00
GAAP diluted net income per share $0.06 $0.03 $0.00

Adjusted basic net income (loss) per
share $0.04 $0.01 $0.03
Adjusted diluted net income per share $0.03 $0.01 $0.02

Shares used to compute basic net
income (loss) per share 170,797 171,393 170,947
Shares used to compute diluted net
income per share 184,180 184,816 184,686

A reconciliation of GAAP cost of revenue and operating expenses for the
quarters ended June 30, 2006 and 2005 to adjusted cost of revenue and
operating expenses is as follows:

Quarter ended June 30, 2006
Stock- Antitrust
As Based Litigation
Reported Compensation Related Adjusted
(in thousands)
Expenses in accordance with GAAP

Cost of revenue $26,646 $(41) $-- $26,605

Operating expenses:
Research and development $18,684 $(1,318) $-- $17,366
Sales and marketing 37,961 (1,434) -- 36,527
General and administrative 14,317 (880) (2,660) 10,777
Antitrust litigation benefit (57,858) -- 57,858 --
Total adjusted operating
expenses, net $13,104 $(3,632) $55,198 $64,670

Quarter ended June 30, 2005
Stock- Antitrust
As Based Litigation
Reported Compensation Related Adjusted
(in thousands)
Expenses in accordance with GAAP

Cost of revenue $24,841 $-- $-- $24,841

Operating expenses:
Research and development $15,321 $(29) $-- $15,292
Sales and marketing 35,044 -- -- 35,044
General and administrative 7,917 (19) -- 7,898
Antitrust litigation expenses 4,650 -- (4,650) --
Total adjusted operating
expenses, net $62,932 $(48) $(4,650) $58,234

Forward Looking Guidance

A reconciliation of GAAP net income per diluted share guidance for the
quarter ending September 30, 2006 and the full year 2006 to
adjusted net income per diluted share is as follows:

Quarter Ending Year Ending
September 30, 2006 December 31, 2006
Low High Low High

Net Income per diluted share in
accordance with GAAP $0.20 $0.22 $0.75 $0.80
Antitrust litigation related
benefit, net (0.33) (0.33) (1.15) (1.16)
Stock-based compensation 0.03 0.03 0.10 0.08
Gains on sales of equity
investments -- -- (0.01) (0.01)
Tax effect of above proforma
items 0.11 0.11 0.39 0.41
Total adjusted net income
per diluted share $0.01 $0.03 $0.08 $0.12

Source: RealNetworks, Inc.

CONTACT: Press, Bill Hankes, +1-206-892-6614, bhankes@real.com, or
Financial, Caroline Hughes, +1-206-892-6718, carolinehughes@real.com, both of
RealNetworks

Web site: http://www.realnetworks.com/
http://investor.realnetworks.com/

-------
Profile: intent